Every trader wants to make money. Making money on the forex market, however, requires the use of an honest broker. Disturbing, then, that even a cursory online search will reveal that the financial world is rife with dishonest brokers ready to prey on unsuspecting traders. Unfortunately, despite many advances in regulatory oversight, the situation is still far from ideal. This is a problem because, if you're dealing with an unscrupulous broker that is trying to take advantage of you, you will not make any money, regardless of how savvy and astute you are as a trader. Broker choice is therefore a decisive factor in your trading success. It is all the more decisive for those traders who are working with the forex market.
It is important, however, to take a lot of broker reviews posted online with a grain of salt. It is well known that bad experiences get more publicity than good ones. Satisfied traders are usually inclined to keep their experiences private, while bad traders are far more likely to lash out at their brokers. Trading success is contingent on the use of a good trading strategy. As it is, many traders enter the forex market without a strategy; when they fail, they invariably blame the broker. Inexperienced traders often try to time the market or speculate on its direction, failing to realize that they're competing with sophisticated traders who are adept at taking advantage of amateurish attempts to beat the market. When the traders lose money, therefore, they believe they got shafted and hold the broker responsible.
As was mentioned, there is no shortage of unscrupulous brokers out there. They have a number of tools to help the trader lose money. The broker can attempt to "pad" the commission fee by playing with quoted rates and triggering stop orders. The broker can also use slippage (more on slippage further below). However, it's worth bearing in mind that brokers need you to trade if they are to make money. If you lose your capital, you're out. The broker can no longer make any commission fees off you. It follows that it’s in the broker's interest that you continue to trade. Your success is also your broker's success.
A few words about slippage. Many traders do not appreciate the fact that slippage is often inevitable and may end up blaming brokers for their losses. There is often no way to avoid slippage when the market is volatile. While the broker will try to do the best it can to fill your order at the price you want, this might not be possible when there are wide swings in the market, and you might experience slippage. You can protect yourself by going with a broker that guarantees to honor your limit or stop order prices, but not all brokers offer such guarantees.
How do you go about choosing a legitimate broker that will help you grow as a trader?
First of all, do your research. Be sure to read broker reviews online; while some skepticism is warranted, you can still get a good picture of how a broker is perceived by traders in comparison to the broker's competitors. You can use your judgment to determine whether a bad review left about the broker is a valid complaint about the broker or just a case of an embittered trader. Note any complaints about poor communication on the part of the broker: a good broker is a broker that communicates well.
Pay attention to reviews that claim the broker did not permit the trader to withdraw funds from the trader's account, as this is a big red flag. It is also a good idea to confirm whether the broker is in good standing with the regulatory authorities – FINRA, for instance, offers a broker verification service (BrokerCheck) that does just that.
Once you've decided on a broker, it is time to open an account. Be sure to read all the account opening documentation carefully to avoid unwelcome surprises further down the road. Read the fine print and all the disclaimers, particularly with respect to incentives and promotions that are often too good to be true (this might be the case with sign-up bonuses, for instance). It is dry reading, but you should read it anyway. It will spell out your rights and help you avoid pitfalls further down the road.
If you're happy with the terms and conditions as outlined in the documentation, you might want to deposit a small amount of funds and trade for a few weeks or so. This will help you get a feel for how the broker operates. Should you end up losing money, it will not be a substantial amount, and you'll be able to move on to another broker.
When dealing with brokers, you should also be on guard against churning. Churning involves the buying or selling of financial instruments by a broker in a client's account with the intention of boosting trading activity and, consequently, commission fees. The broker enters unnecessary trades solely to earn commission revenue, without there being any discernible benefits for the client. While this practice is illegal in the US, as with many other practices that are illegal, there's no guarantee that a broker will not engage in it. Churning is only possible if the broker has discretionary authority over your account (i.e., the broker can make trading decisions without prior authorization from you – the broker does not need to obtain prior approval each time the broker wants to establish a position). If the broker does not have discretionary authority over your account – if all trading decisions originate with you – the broker should not be able to engage in churning, since any trades done without your permission are unauthorized trades.
In cases where a broker has discretionary authority over a client's account, to ensure that no churning occurs, the client can keep tabs on the broker by evaluating whether the trading activity in the account is appropriate for the client's risk profile and investment objectives. Trading activity that appears to be unduly frequent and/or does not seem to serve any identifiable purpose might also be a sign of churning. If you believe that you're a victim of churning, you should contact the regulatory authorities and, if appropriate, seek legal counsel.
Despite all precautions, you might still find yourself in the unfortunate situation of having to deal with an unsavory broker. If that’s the case, your first course of action should probably be to contact the broker. It's worth it to see if you can reach some kind of an agreement with the broker; there's always a possibility that the broker might prove to be accommodating. There's also a possibility that the broker might have acted properly in that particular situation, so be sure to review the pertinent documentation as well.
If you still believe the broker has acted improperly, inform the broker that you'll be obliged to review your options and take such further steps as may be appropriate. Your options might include lodging a complaint with the relevant regulatory authorities (e.g., FINRA) and/or posting a negative review online.
To sum everything up, be sure to do your homework when looking for a broker. When you do decide on one, start small by depositing a modest amount of money. If the broker is a good one, you’ll be able to trade with that broker for as long as you need to. In the event that things do go wrong, however, you won’t end up facing severe losses if you start small. Finally, you also have some options at your disposal if the broker acts unethically or does something that’s illegal.